USA pression Partners(USAC) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, changes in partners' capital, and cash flows, along with detailed notes explaining the company's organization, accounting policies, and specific financial line items Unaudited Condensed Consolidated Balance Sheets The balance sheets show the company's financial position as of June 30, 2024, and December 31, 2023, highlighting increases in total assets and long-term debt, alongside a significant reduction in Preferred Units due to conversions into common units Balance Sheet Summary | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------------------------------------------------------------------------ | :--------------------------- | :------------------------------- | | Total Assets | $2,821,605 | $2,736,760 | | Total Liabilities | $2,713,964 | $2,553,711 | | Long-term debt, net | $2,484,053 | $2,336,088 | | Preferred Units | $168,809 | $476,334 | | Common units outstanding | 117,007,411 | 100,986,011 | Unaudited Condensed Consolidated Statements of Operations The statements of operations reveal strong revenue and net income growth for both the three and six months ended June 30, 2024, compared to the prior year, driven by increased contract operations and parts/service revenue, despite higher interest expenses Three Months Ended June 30: | Metric | 2024 (in thousands) | 2023 (in thousands) | Change (%) | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Total Revenues | $235,313 | $206,920 | 13.7% | | Operating Income | $77,372 | $51,427 | 50.5% | | Net Income | $31,238 | $23,584 | 32.5% | | Basic Net Income per Common Unit | $0.23 | $0.12 | 91.7% | | Diluted Net Income per Common Unit | $0.23 | $0.11 | 109.1% | | Distributions Declared per Common Unit | $0.525 | $0.525 | 0.0% | Six Months Ended June 30: | Metric | 2024 (in thousands) | 2023 (in thousands) | Change (%) | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Total Revenues | $464,589 | $404,044 | 15.0% | | Operating Income | $144,244 | $102,484 | 40.7% | | Net Income | $54,811 | $34,525 | 58.8% | | Basic Net Income per Common Unit | $0.42 | $0.10 | 320.0% | | Diluted Net Income per Common Unit | $0.42 | $0.10 | 320.0% | | Distributions Declared per Common Unit | $1.05 | $1.05 | 0.0% | - Net income attributable to common unitholders' interests increased significantly: $26.9 million for Q2 2024 (vs. $11.4 million in 2023) and $46.0 million for H1 2024 (vs. $10.2 million in 2023)[9] Unaudited Condensed Consolidated Statements of Changes in Partners' Capital (Deficit) This statement details the changes in partners' capital (deficit), showing a substantial improvement in the partners' deficit balance, primarily driven by the exercise and conversion of Preferred Units into common units during the first half of 2024 - Partners' deficit ending balance improved to $(61.2) million as of June 30, 2024, from $(293.3) million at December 31, 2023[13] - Exercise and conversion of Preferred Units into common units contributed $262.6 million in Q2 2024 and $38.1 million in Q1 2024 to partners' deficit[13] Unaudited Condensed Consolidated Statements of Cash Flows The cash flow statements show an increase in net cash provided by operating activities for the six months ended June 30, 2024, while investing activities saw higher capital expenditures. Financing activities were significantly impacted by the issuance of new senior notes and the defeasance of existing debt Cash Flow Summary | Cash Flow Activity | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :---------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $162,658 | $130,209 | | Net cash used in investing activities | $(146,715) | $(105,309) | | Net cash used in financing activities | $(15,945) | $(24,904) | - Key financing activities in H1 2024 included $1.0 billion from the issuance of senior notes and $(748.8) million for investments in government securities related to the legal defeasance of Senior Notes 2026[16] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed disclosures on the company's organization, significant accounting policies, and specific financial statement line items, including trade accounts receivable, inventories, property and equipment, debt obligations, preferred and common units, revenue recognition, related-party transactions, commitments, contingencies, and recent accounting pronouncements Note 1 – Organization and Description of Business - USA Compression Partners, LP provides natural gas compression and treating services under fixed-term contracts in major U.S. shale plays[21] - The General Partner, USA Compression GP, LLC, is wholly owned by Energy Transfer[21] Note 2 – Basis of Presentation and Summary of Significant Accounting Policies - Financial statements are prepared in accordance with GAAP and SEC rules, with operating results for interim periods not necessarily indicative of full-year results[23] Senior Notes Fair Value | Senior Notes | Aggregate Principal (June 30, 2024) | Fair Value (June 30, 2024) | | :-------------------- | :---------------------------------- | :------------------------- | | Senior Notes 2027 | $750,000 thousand | $750,000 thousand | | Senior Notes 2029 | $1,000,000 thousand | $1,003,750 thousand | - The fair value of the interest-rate swap increased to $8.2 million as of June 30, 2024, from $1.2 million at December 31, 2023[41] Note 3 – Trade Accounts Receivable - The allowance for credit losses remained constant at $2.3 million as of June 30, 2024, and December 31, 2023[43] Note 4 – Inventories Inventory Components | Inventory Component | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------- | :--------------------------- | :------------------------------- | | Serialized parts | $68,776 | $59,901 | | Non-serialized parts | $62,507 | $54,827 | | Total inventories | $131,283 | $114,728 | Note 5 – Property and Equipment and Identifiable Intangible Assets - Net property and equipment increased to $2.31 billion as of June 30, 2024, from $2.24 billion at December 31, 2023[45] - Impairment of compression equipment was $0.3 million for Q2 2024 (2 units retired) compared to $10.3 million for Q2 2023 (33 units retired), reflecting fewer retirements[48] - Identifiable intangible assets, net, decreased to $231.0 million as of June 30, 2024, from $245.7 million at December 31, 2023, due to amortization[50] Note 6 – Other Current Liabilities Other Current Liabilities Breakdown | Liability Component | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :--------------------------- | :------------------------------- | | Accrued interest expense | $39,240 | $31,960 | | Accrued unit-based compensation liability | $28,098 | $21,896 | | Accrued capital expenditures | $9,483 | $13,672 | Note 7 – Derivative Instrument - The company has an interest-rate swap with a notional principal of $700 million, maturing December 31, 2025, to manage floating-rate risk[52] - The fair value of the derivative instrument (interest-rate swap) increased to $8.2 million as of June 30, 2024, from $1.2 million at December 31, 2023[41][54] - Gain on derivative instrument was $3.1 million for Q2 2024, down from $14.6 million for Q2 2023[54] Note 8 – Debt Obligations - Total long-term debt, net, increased to $2.48 billion as of June 30, 2024, from $2.34 billion at December 31, 2023[55] - Issued $1.0 billion aggregate principal amount of Senior Notes 2029 (7.125% interest, due March 15, 2029) on March 18, 2024[61] - Legally defeased the $725.0 million Senior Notes 2026 on March 18, 2024, resulting in a $5.0 million loss on extinguishment of debt for the six months ended June 30, 2024[67][68] - Outstanding borrowings under the Credit Agreement were $756.2 million as of June 30, 2024, with $424.4 million available to be drawn[57] Note 9 – Preferred Units - Preferred Units outstanding decreased significantly from 500,000 at December 31, 2023, to 180,000 at June 30, 2024, due to conversions[72] - The balance of Preferred Units decreased from $476.3 million at December 31, 2023, to $168.8 million at June 30, 2024[78] - 320,000 Preferred Units were converted into 15,990,804 common units during 2024 (40,000 in January and 280,000 in April)[75][76][78] Note 10 – Partners' Deficit - Common units outstanding increased to 117,007,411 as of June 30, 2024, from 100,986,011 at December 31, 2023, primarily due to Preferred Unit conversions[79] - Cash distributions per common unit remained stable at $0.525 per quarter for Q1 and Q2 2024[80] Note 11 – Revenue Recognition Total Revenues by Type of Service | Revenue Type | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :-------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Contract operations revenue | $229,091 | $202,403 | $452,871 | $395,545 | | Retail parts and services revenue | $6,222 | $4,517 | $11,718 | $8,499 | | Total revenues | $235,313 | $206,920 | $464,589 | $404,044 | - The aggregate amount of transaction price allocated to unsatisfied performance obligations related to contract operations revenue was $1.2 billion as of June 30, 2024[90] Note 12 – Transactions with Related Parties - Related-party revenues from Energy Transfer affiliates increased by 9.6% to $11.6 million for the six months ended June 30, 2024, driven by increased demand for natural gas treating services[90] - Related-party receivables were $0.1 million as of June 30, 2024, compared to $0 at December 31, 2023[90] Note 13 – Commitments and Contingencies - One customer accounted for approximately 12% of total revenues for the three months ended June 30, 2024[91] - The company is protesting Oklahoma Tax Commission assessments with an estimated loss range of $0 to $29.7 million[94] - An IRS examination for 2019-2020 has a potential loss range of $0 to $27.4 million[95] Note 14 – Recent Accounting Pronouncements - The company is evaluating ASU 2023-09 (Income Taxes), effective for annual periods after December 15, 2024[97] - The company is evaluating ASU 2023-07 (Segment Reporting), effective for annual periods after December 15, 2023[98] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including operating highlights, detailed financial performance analysis, liquidity and capital resources, and reconciliations of non-GAAP financial measures Operating Highlights The company experienced significant growth in its compression services business, with increases in fleet horsepower, revenue-generating horsepower, and average revenue per horsepower, leading to improved horsepower utilization Operating Metrics | Metric | June 30, 2024 | June 30, 2023 | Change (%) | | :------------------------------------------ | :------------ | :------------ | :--------- | | Fleet horsepower (at period end) | 3,851,970 | 3,716,177 | 3.7% | | Revenue-generating horsepower (at period end) | 3,538,683 | 3,346,657 | 5.7% | | Average revenue-generating horsepower (H1) | 3,494,245 | 3,275,527 | 6.7% | | Average revenue per revenue-generating horsepower per month (Q2) | $20.29 | $18.65 | 8.8% | | Average revenue per revenue-generating horsepower per month (H1) | $20.13 | $18.42 | 9.3% | | Horsepower utilization (at period end) | 95.0% | 93.7% | 1.3% | | Average horsepower utilization (H1) | 94.7% | 93.0% | 1.7% | - Increases were driven by new compression units, redeployment of existing units, and increased demand for services due to higher crude oil and natural gas production in the U.S[106] - Higher market-based rates and CPI-based price increases on customer contracts contributed to the revenue growth[107] Financial Results of Operations The company reported substantial increases in total revenues, operating income, and net income for both the three and six months ended June 30, 2024, compared to the prior year. This growth was primarily fueled by higher contract operations and parts/service revenue, while impairment charges significantly decreased. Interest expense rose due to increased borrowings and rates, and a loss on debt extinguishment was recorded in H1 2024 Three Months Ended June 30: | Metric | 2024 (in thousands) | 2023 (in thousands) | Change (%) | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Total Revenues | $235,313 | $206,920 | 13.7% | | Contract Operations Revenue | $223,643 | $196,982 | 13.5% | | Parts and Service Revenue | $5,827 | $4,102 | 42.1% | | Impairment of Compression Equipment | $311 | $10,273 | * | | Operating Income | $77,372 | $51,427 | 50.5% | | Interest Expense, net | $(48,828) | $(42,045) | 16.1% | | Net Income | $31,238 | $23,584 | 32.5% | Six Months Ended June 30: | Metric | 2024 (in thousands) | 2023 (in thousands) | Change (%) | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Total Revenues | $464,589 | $404,044 | 15.0% | | Contract Operations Revenue | $441,747 | $385,521 | 14.6% | | Parts and Service Revenue | $11,287 | $7,980 | 41.4% | | Related Party Revenue | $11,555 | $10,543 | 9.6% | | Impairment of Compression Equipment | $311 | $11,464 | * | | Operating Income | $144,244 | $102,484 | 40.7% | | Interest Expense, net | $(95,494) | $(81,835) | 16.7% | | Loss on Debt Extinguishment | $(4,966) | $0 | * | | Net Income | $54,811 | $34,525 | 58.8% | - Contract operations revenue growth was driven by an 8.8% (Q2) and 9.3% (H1) increase in average revenue per revenue-generating horsepower per month, and a 6.2% (Q2) and 6.7% (H1) increase in average revenue-generating horsepower[108][116] - Cost of operations (exclusive of depreciation and amortization) increased due to higher direct labor costs ($4.9 million in Q2, $9.9 million in H1) and direct expenses ($2.1 million in Q2, $6.3 million in H1)[110][119] Liquidity and Capital Resources The company's liquidity is supported by operating cash flows and its Credit Agreement. It projects significant expansion capital expenditures for 2024, with H1 2024 seeing increased operating cash flow and higher cash used in investing activities. Financing activities were notably impacted by new senior notes issuance and debt defeasance - Primary liquidity needs include financing capital expenditures, servicing debt, funding working capital, and paying distributions[136] - Projected expansion capital expenditures for 2024 are between $195.0 million and $205.0 million; $171.8 million was spent in H1 2024[141] Cash Flow Summary | Cash Flow Activity | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :---------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $162,658 | $130,209 | | Net cash used in investing activities | $(146,715) | $(105,309) | | Net cash used in financing activities | $(15,945) | $(24,904) | - As of June 30, 2024, the company had $756.2 million outstanding borrowings under the Credit Agreement and $424.4 million available to be drawn[145] - The $725.0 million Senior Notes 2026 were legally defeased on March 18, 2024, and redeemed on April 4, 2024, using proceeds from the $1.0 billion Senior Notes 2029 issuance[146][147] Non-GAAP Financial Measures The company utilizes non-GAAP financial measures such as Adjusted Gross Margin, Adjusted EBITDA, Distributable Cash Flow (DCF), and DCF Coverage Ratio to provide additional insights into its operating performance and liquidity. These metrics showed significant year-over-year improvements for both the three and six months ended June 30, 2024, reflecting enhanced profitability and cash generation Non-GAAP Financial Measures (Q2 2024 vs. Q2 2023): | Metric | 2024 (in thousands) | 2023 (in thousands) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | | Adjusted gross margin | $157,151 | $136,998 | 14.7% | | Adjusted gross margin percentage | 66.8% | 66.2% | 0.6% | | Adjusted EBITDA | $143,673 | $124,998 | 14.9% | | Adjusted EBITDA percentage | 61.1% | 60.4% | 0.7% | | DCF | $85,863 | $67,038 | 28.1% | | DCF Coverage Ratio | 1.40x | 1.30x | 7.7% | Non-GAAP Financial Measures (H1 2024 vs. H1 2023): | Metric | 2024 (in thousands) | 2023 (in thousands) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | | Adjusted gross margin | $311,355 | $267,457 | 16.4% | | Adjusted gross margin percentage | 67.0% | 66.2% | 0.8% | | Adjusted EBITDA | $283,068 | $243,159 | 16.4% | | Adjusted EBITDA percentage | 60.9% | 60.2% | 0.7% | | DCF | $172,452 | $129,651 | 33.0% | | DCF Coverage Ratio | 1.40x | 1.26x | 11.1% | - Adjusted gross margin and Adjusted EBITDA increases were primarily due to higher revenues and easing inflation pressures on cost of operations[130][131] - DCF increased due to higher Adjusted gross margin, decreased Preferred Unit distributions (following conversions), and increased cash from derivative instruments, partially offset by higher cash interest expense and maintenance capital expenditures[133][134] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company faces indirect commodity price risk, as demand for its services is tied to natural gas and crude oil production. Direct market risk stems from variable interest rates on its Credit Agreement, partially mitigated by an interest-rate swap. Credit risk is primarily associated with customer receivables - Indirect commodity price risk: A 1% decrease in average revenue-generating horsepower would result in an annual decrease of approximately $8.4 million in revenue and $5.7 million in Adjusted gross margin[169] - Interest rate risk: $756.2 million of variable-rate indebtedness outstanding at a weighted-average interest rate of 8.10% as of June 30, 2024[170] - Interest rate sensitivity: A 1% increase or decrease in the effective interest rate would result in an annual change of approximately $7.6 million in interest expense[170] - An interest-rate swap with a notional principal of $700 million helps manage floating-rate risk; a 1% change in the SOFR forward curve would change its fair value by $11.2 million[171] ITEM 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, at a reasonable assurance level, with no material changes in internal control over financial reporting during the last fiscal quarter - Disclosure controls and procedures were effective as of June 30, 2024[174] - No material changes in internal control over financial reporting occurred during the last fiscal quarter[175] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The company is involved in various legal claims and litigation in the ordinary course of business, but management does not anticipate a material adverse effect on its financial position, results of operations, or cash flows - Management does not expect legal proceedings to have a material adverse effect on consolidated financial position, results of operations, or cash flows[177] - Specific tax contingencies are detailed in Note 13 of the financial statements[177] ITEM 1A. Risk Factors Investors are directed to review the comprehensive risk factors outlined in the company's 2023 Annual Report on Form 10-K and subsequent SEC filings, as these factors could significantly impact actual results compared to forward-looking statements - Security holders and potential investors should carefully consider the risk factors set forth in Part I, Item 1A 'Risk Factors' of the 2023 Annual Report and subsequent SEC filings[178] ITEM 6. Exhibits This section lists all documents filed, furnished, or incorporated by reference as part of the report, including key organizational documents, subsidiary guarantor lists, and certifications from the Chief Executive Officer and Principal Financial Officer - Includes Certificate of Limited Partnership, Second Amended and Restated Agreement of Limited Partnership, and List of Subsidiary Guarantors and Co-Issuer[179] - Certifications of the Chief Executive Officer and Principal Financial Officer are filed/furnished as exhibits[179] - The financial statements and cover page are formatted in Inline XBRL (eXtensible Business Reporting Language)[179] SIGNATURES SIGNATURES The report is officially signed by G. Tracy Owens, Vice President of Finance and Chief Accounting Officer, on behalf of USA Compression Partners, LP, dated August 6, 2024 - The report was signed by G. Tracy Owens, Vice President of Finance and Chief Accounting Officer[182] - The signing date was August 6, 2024[182]